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Sensemaker: Chinese crunch

Sensemaker: Chinese crunch

What just happened

Long stories short

  • Ex-BBC journalist Emily Maitlis said an “active agent” of Britain’s Conservative Party was shaping the broadcaster’s news output.
  • At least 22 people were killed in a Russian rocket attack on a railway station on Ukraine’s independence day.
  • Joe Biden cancelled $10,000 of student debt for millions of Americans.

Chinese crunch

In about ten weeks Xi Jinping plans to launch an unprecedented third term in power in Beijing. 

The constitution has been tweaked to allow it. The apparatus of a surveillance state is in place in case anyone objects. Outwardly there are few signs that anyone does, but the party and people are restive* because the economy is misfiring like a petrol car with sugar in the tank.

Four clouds could rain on Xi’s parade:

Zero Covid. Earlier this month we noted a flash lockdown in a Shanghai Ikea. It was ordered not because of an actual case of Covid but by fears that a shopper knew someone who had it. Then, last week, a minor outbreak shut down the entire holiday island of Hainan. Around 150,000 vacationers were stranded. Many were furious.

This is zero Covid in practice. Xi is committed to it because to reverse himself would be to lose face and China’s population is insufficiently vaccinated to let the virus rip. But the results – besides Ikea lockdowns – include low retail sales, factory lockdowns, port closures, freight freezes and a continued general slowdown in getting Chinese goods to the world.

Property. If you like footage of tower blocks collapsing you’ll love this, but it reflects the slow-motion implosion of a property sector on which Xi was relying for forecast GDP growth of 5.5 per cent. 

  • China has built 10 billion square metres more residential and commercial property space than it needs.
  • The boom was fuelled by regional governments’ hunger for land sales revenues and citizens’ desire for a better investment than savings accounts.
  • The boom has bust because supply now dwarfs demand. Developers can’t complete new projects and off-plan buyers are refusing to make mortgage payments on unfinished flats. 
  • Some local authorities have resorted to demolition to redress the balance. Three billion square metres’ worth of new-builds have been reduced to rubble in recent years, the Telegraph reports – enough residential space for 75 million people.

Broader domestic demand. Actual year-on-year GDP growth is running at 2.7 per cent – less than half Xi’s target, with sliding domestic demand for metals, power, food and capital goods and no obvious alternative source of growth.

  • The western export markets that delivered annual growth of more than 10 per cent for most of the 1990s are now stagnant or heading into recession because of Russia’s war with Ukraine; and
  • China’s own productivity growth, which used to account for nearly half its overall growth, now delivers less than a percentage point of increased GDP a year.
  • Not helpful: a record-breaking drought has caused parts of the Yangtze river to dry up, sparking a shortage of hydropower and forcing factories to shut down.

Troubled tech. Until October 2020 Tencent, Alibaba, Pinduoduo and other Chinese tech behemoths were well positioned to sustain markets and state revenues. Then Xi prioritised power for himself over profit for the billionaire class by making an example of Alibaba’s Jack Ma, whose Ant IPO was derailed by burdensome new regulations. The sector has been flatlining ever since.

Li Keqiang, Xi’s second-in-command, stepped out of his boss’s shadow in May to signal an end to the showdown – but as our Tech States Sensemaker reports this week, Tencent still managed to post a 56 per cent year-on-year fall in second-quarter profits.

China’s top economic managers can’t catch a break. When the People’s Bank of China recently allowed local governments to raise an extra $228 billion in bonds it was seen as desperate, not resourceful.

*Unrest. Beijing’s unwritten contract with the 500 million Chinese lifted out of poverty by state-backed capitalism requires social order and political passivity in return for continued prosperity. That contract is being tested. Youth unemployment is at a record 20 per cent and grumpy mortgage-holders have been protesting in 100 cities.

Four years ago Oliver Bullough wrote in Moneyland about elite male Chinese officials harvesting their partners’ eggs for surrogate Japanese children to whom to transfer assets for safekeeping abroad. The other rationale, one woman who surrendered eggs said, was that “if there’s someone in the family with Japanese citizenship it’ll make it easier for us to flee if China collapses”.

No one is forecasting a Chinese collapse just yet, but the list of reasons to plan for uncertain times is getting longer.


Scotland’s borrowing bill
Scotland’s public spending deficit shrank by 10 per cent in 2021-22, as tax revenue from North Sea oil jumped to its highest in eight years and spending on Covid schemes fell. The shortfall between what Scotland raises in tax and spends on public services dropped to a still-sizeable £23.7 billion, or 12.3 per cent of GDP, according to new figures, compared with 6.1 per cent for the UK as a whole. John Swinney, Scotland’s deputy first minister, said the figures “highlight how the UK’s response to the [cost of living] crisis is being built on Scotland’s natural resources – not least with its windfall tax on the North Sea.” But the booming oil revenues could be a problem for Nicola Sturgeon’s government in its bid for independence. Sturgeon has accepted the need to cut oil consumption in order to comply with Scotland’s ambitious net zero targets, and is under pressure from her coalition partners – the Greens – to close down oil fields. Swinney refused to say whether a forthcoming paper on the economics of independence would accept the SNP growth commission’s advice to ignore oil receipts. 


Fossil-fuel car bans
Big news for the Golden State: regulators in California are expected to ban the sale of petrol cars. It means that by 2035 all new cars sold in the state will have to be zero-emission vehicles, up from 12 per cent today. Gavin Newsom, the state governor, said the regulations will mean “the elimination of the tailpipe”. As the largest auto-market in the country and one of the largest in the world, California matters. That said, if Donald Trump is serious about running for president in 2024, he is likely to have something to say about the petrol crackdown. California isn’t the only area taking the lead on clean energy. China’s Hainan island announced today that it will become the country’s first region to ban sales of fossil-fuel powered cars by 2030. Tax breaks and increased charging networks are also included in their carbon neutrality plan. 

The 100-year life health, education AND GOVERNMENT

Sunak and the scientists 
With just over a week to go until the next UK prime minister is announced, every word counts. Former chancellor Rishi Sunak seems to have taken that message to heart in a Spectator interview that landed this morning. Despite professing he wasn’t interested in pointing fingers, there is some very definite finger pointing at scientific advisers and the government who – Sunak believes – jumped into decisions on lockdowns without full consideration of the consequences. The key line: “we shouldn’t have empowered the scientists in the way we did.” Why so candid now? Because, he says, “the leader matters”. No one is disputing that. His rival Liz Truss, who is leading in the polls, raised hackles this week for saying she would divert £13 billion earmarked for the NHS to social care. Social care needs cash too, but as the chief executive of health think tank King’s Fund pointed out, “robbing Peter to pay Paul” isn’t a sustainable solution. 

Our planet CLIMATE AND geopolitics

Drought archaeology
As Europe experiences its worst drought in 500 years, rivers and reservoirs across the continent are drying up to reveal long-submerged relics and shipwrecks. In western Spain, the Dolmen of Guadalperal, known as the “Spanish Stonehenge’”and believed to date back to 5000 BC, rose from a drought-hit dam. More than a dozen sunken Nazi warships containing explosives and ammunition have emerged from the bottom of the River Danube; last month an unexploded 450kg World War Two bomb was found in Italy’s Po river. 6,000 year-old cup-marked stones have been pictured in a Cornish reservoir. It’s not just happening in Europe: China’s Yangtze River has fallen to its lowest level since 1865, revealing a 600 year-old statue of a monk sat on lotus leaf. Archaeologists are delighted: everyone else affected by the drought may wish the relics had stayed hidden.


Kenyans sue Britain
Two tribes from the Kericho region in western Kenya have filed a legal case against the British government in the European Court of Human Rights for alleged colonial-era abuses. They are seeking £168 billion in compensation for the alleged theft of indigenous land, torture and the displacement of ethnic communities. Kericho is the centre of global tea production: multinational corporations now operate on the plantations that were once home to these tribes. Efforts to engage the UK in restorative measures began in 2019 when the plantation workers brought a case to the UK Supreme Court. When this failed, 100,000 members of the Talai clan appealed directly to Prince William in a letter in May this year. The UK Foreign Office told the BBC it was “inappropriate to comment on legal proceedings”. 

Thanks for reading. Please share this around and tell us what you think. Send an email to sensemaker@tortoisemedia.com.

Giles Whittell

Additional reporting by Phoebe Davis, Barney Macintyre, Laoise Murray and Sam Robert.

Photograph: Getty Images

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